Daryl Byrd, the CEO of Iberiabank (IBKC) says a wave of bank mergers is inevitable and will be larger than expected. Rusty Cloutier, his counterpart at MidSouth Bancorp (MSL), says a lack of able buyers is miring consolidation.
The two Louisiana bankers, who head two of the most acquisitive banks on the Gulf Coast, agree on at least one thing: community banks are going to have a harder time staying independent. Mounting costs, succession issues, capital-raising problems, and fears over a hike in the capital-gains tax are among the reasons the CEOs gave during separate presentations at American Banker's M&A Symposium in New York.
Byrd's $11.8 billion-asset Iberiabank has purchased three banks since the beginning of 2011 and in March agreed to pay $43.7 million for Florida Gulf Coast Bancorp in Fort Myers, Fla. The $1.4 billion-asset MidSouth, led by Cloutier, closed the purchase in December of First Louisiana National Bank of Breaux Bridge, La. and also bought a branch in Tyler, Texas from Beacon Federal.
During their presentations, Byrd focused on what consolidation will look like when it comes while Cloutier emphasized the hurdles to doing deals right now and how to surmount them.
To navigate the tricky market for bank M&A, Cloutier said, requires deft integration skills and the discipline to walk away if the price is too high. Acquirers also should only pursue deals with substantial cost savings, and they must take care to communicate frequently with regulators, he said.
"If the regulators are not your best friend you're talking to regularly, you're going to have a problem," Cloutier said.
Cloutier predicted that the shortage of able acquirers would drive down bank prices - it's "Economics 101" - and that prospective sellers need to stop obsessing over what their equity is worth and start focusing on whether they can do a stock deal with a good bank that will reward shareholders by increasing in value over time.
While some market watchers have projected that 2,000 of the nation's roughly 7,000 banks will be gone in seven years, Byrd said he expects even more casualties - perhaps 2,500 to 3,000 institutions will be merged out of existence, he predicted, noting the rapid pace at which the number of U.S. banks has contracted since interstate banking laws were loosened in the 1980s.
Expenses are high and banks will need to hold more capital from now on, Byrd said. The profit recovery at banks so far has been attributable more to the winding down of loan-loss reserves than to actual growth. The housing market is rebounding slowly and small banks that specialize in mortgages will not be able to evolve into business lenders, he said.
"Far too many banks have been one-trick real estate ponies,'' Byrd said. "Business models just don't work."
He said Iberiabank is positioned to be an active buyer: It has four separate teams for running loan portfolio due diligence as well as a hands-on approach to making transactions work.
Byrd personally scouts out a sales target's branches and makes a point of making sure as many customer-facing branch employees as possible keep their jobs after a deal is done. He reassures a seller's branch workers that their jobs are safe immediately after a deal is signed because it helps establish goodwill with future employees and customers, he said.
Iberiabank is still able to reduce headcount at a new subsidiary because of the high turnover of branch workers, Byrd said. But "there is no point in scaring people," he said.